Mark Cabana on the Fed, QT and Treasury Funding

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, it's a busy week.

Joe Weisenthal (0:19)

It is a busy week. It sort of ousnuck up on me. I knew it was Fed week.

It's also Jobs Week. It's also, and I'm not even sure the degree to which it matters, Quarterly Refunding Week, sort of controversial. There is a lot going on.

Tracy Alloway (0:33)

I got tipped off to the fact it was Quarterly Refunding Week when everyone started talking about deficits on Monday.

Joe Weisenthal (0:38)

Oh yeah.

Tracy Alloway (0:38)

We got the estimates of borrowing needs. That's the day suddenly everyone becomes really worried about the credit worthiness of the future United States of America.

Joe Weisenthal (0:47)

There's this theory that's going around. It's kind of controversial. I see it on Twitter sometimes that this is really important for markets, that some mix of bills and bonds and how much really matters.

I don't really know. I'm sort of skeptical, but maybe there's something to that. But you know, there's a lot of moving parts right now. And of course it is Fed Week. I don't think anyone expects a rate cut, but I think the expectation is some sort of like maybe declaration of victory, and which could then be used to set up the beginning of the cutting cycle.

Tracy Alloway (1:21)

Well, it's interesting you mentioned this theory about it having a potential impact on markets, because of course the other thing that we expect the Fed to discuss this week is quantitative tightening. So the shrinking of the balance sheet. And I find this is the thing that gets people really riled up, the idea that stocks are up because of central bank liquidity, and once QT begins, it's all gonna wash away, and stocks are gonna fall. Of course, we haven't seen that, but we're still waiting on a lot of additional info about the size, the shape, the speed of QT. And there's a lot of discussion over whether or not that could change. And I should just say the meeting is tomorrow, but I don't think we're gonna get a lot of detail on QT until the minutes actually come out in February. But the point is, there is loads to discuss.

Joe Weisenthal (2:09)

Yeah, totally. And the one thing I'll say to on the balance sheet, I'll say two things. One is, for a long time, it was just the story. The Fed is pumping money into the market, and as soon as the balance sheet starts to shrink, then that's gonna be bad for risk assets. That, in my opinion, has now officially been disproven because the balance sheet has been shrinking basically since the middle of 2022, and stocks are at all time highs. So that's over. That story, it's a thesis. It's broken, in my opinion. But what it means for banks, what it means for bank liquidity, how far they can shrink it before it creates problems, such as what we talked about, I think it was in 2019

This still matters quite a bit, and there's still interesting policy questions related to that.

Tracy Alloway (2:52)

Absolutely. So who better to discuss all of these issues than Mark Cabana, rate strategist over at Bank of America. Mark, thank you so much for coming on the show.

Mark Cabana (3:02)

Thanks for having me.

Tracy Alloway (3:03)

We are longtime fans of your work, and it's kind of a treat for us that we could do this and release the episode on the day of the Fed meeting. So we're recording it just the day before. So we're gonna get all your thoughts on what's going on at the moment. But with your rates hat on, when you look at a week like this, when you have the QRA, you have jobs, you have the Fed, what are you most interested in? How are you weighing those different events?

Mark Cabana (3:30)

Well, thanks for having me. I'm also a big fan, so it's a real thrill to be here.

Joe Weisenthal (3:33)

Thank you.

Mark Cabana (3:34)

So when we think about the rates outlook, we think that the expected path of the overnight rate is really the most important determinant of where rates go. Henceforth, the Fed is clearly the most important consideration for us this week.

The payroll report and other data this week will inform that. And then, still important, but perhaps secondary is the quarterly refunding from the Treasury, that supply announcement. Though I agree with Joe, it has certainly been a focus in markets and probably much more so than the US Treasury ever would have wanted. And that's really because they've surprised the market with the last two refundings.